ANIS SYAFIQAH BT MOHAMMAD AZMINOR ADILAH BINTI MOHD RASHIDCHAPTER 9CORPORATE RISK CONTROL

RISK MANAGEMENTTECHNIQUES

RISK CONTROLObjective of risk controlTo minimize the total cost of risk of an organizationTo ensure long-term economic survival or organization after the occurrence of major loss event.Includes1) Risk avoidance2) Risk reduction3) Segregation of exposure units4) Contractual transfer for risk control

Risk avoidance

Risk ReductionIncludes two approaches

Loss preventionPreventing the loss from occurring by reducing the probability off loss

Loss controlMinimize the size of losses that do accur.

Loss prevention

Loss control

Specialized loss control measures

Measures taken to reduce the losses arising from different risk exposures are very specialized and complexDepending on the exposure units and perils.Few general loss control measures that are adopted to reduce losses caused by most perils that organization is exposed to a generic in nature.There are segregation of exposure units and salvage.Salvage refer to immediate action taken by organization to preserve the value of the asset that has been damaged in an accident. Eg: stock may be damaged by water or smoking during fire. Action taken to prevent the good form suffering further damage and to preserve their value called salvage.

Segregation of exposure units

Contingency planningThere is three components of contingency planning.Pre-loss phase- preparation and implementation of contingency planLoss phase- crisis management plan to save lives and limit damage.Post-loss phase- business recover plan to initiate speedy and effective business recovery.

Crisis management planningDefined as planning, organizing and controlling of the companys asset and activities in the critical period immediately before, during and after an actual loss event.This is to reduce the loss of resources essential to companys eventual full recovery.To ensure the corporation will survive any foreseeable major accidental losses.Reasons for developing a crisis management planMitigate the impact of lossContain the lossResponse to control and situation effectivelyResolve or recover from crisis situationBusiness recovery planning need to be continuously updated and reviewed regularly to take into account changes in operation and market conditions.

Key element of good crisis management plan.Organizational structure of crisis management team- chain of command and responsibilities of team members should clearly establish in the plan.Protection and evacuation of personnel-should contain measures to protect all employees from any foreseeable danger that might arise during a crisis.Safeguarding of production facilities-enable the organization to continue operation after the crisis event, procedures should be developed.Communication during and after the crisis( media management)-organization must effectively communicate with customers, suppliers, regulators, employees and media during a crisis event. Should specify the procedure for supplying information during and after crisis.

Contractual transfer for risk control (non-insurance transfer)To shift legal responsibility for a loss or responsibility for financial consequences off loss to another organizationCan be divided into two categories.Risk control transfer- transferor transfer legal responsibility of loss to transferee through the use of contract or agreements.Risk financing transfer- one organization make promise to pay for the loss incurred by another organization even it is not legally responsible for the loss.

Importance of Risk Control

Prevent losses,reduce the severity and frequency of losses and allow business operation to recover speedily through effective contigency plans.

Eg :- installation of automatic fire sprinkler system is one of the best fire safety measures to extinguishes fire effectively .

Risk control measure should be used only when the marginal benefits equal that of marginal cost inccured. However,application of this marginal cost marginal analysis to risk control is complicated by the following factors :-

1) The benefit generated from risk control are difficult to measure as it involves measuring something that does not happen in the future.

2)Time difference between benefit generated and the cost inccured to implement risk control measures.

Role of Government in Risk Control

Introduce a number of safety legislation or regulations which impose mandatory duty on companies to implement risk control measure in connection with industrial safety and fire safety of buildings.

For example,the Fire Safety Act 1988 imposes a set of fire safety rules on the buildings and the Occupational Safety and Health Act 1994 sets out the laws about health and safety requirements at workplace.

Theories of Accidental Causation and Control

1)Domino TheoryDeveloped mainly from the study of industrial accidents and worker injuries.

2) Energy Theory considers accident as a result of uncontrolled release of energy

Loss Prevention and Control for Product Liability

Loss Prevention and Control against Theft Risk